‘Working’ Capital for SMEs
The government is working hard to strengthen MSME sector in India. The redefinition of MSMEs on basis of financial turnover, relief by RBI in granting more time to pay dues, increased credit support allocation, corporate tax relief, Prime Minister’s Employment Generation Program, Pradhan Mantri Mudra Yojana, increased outlays for National Manufacturing Programme, Credit Linked Capital Subsidy Scheme, entrepreneurial and employee skill development initiatives etc. should impact fortunes of MSME sector employing 111 million people and contributing nearly 31% in GDP of India.
But the headwinds are strong even now. Demonetisation and GST seem to have taken it toll. Some of the southern States were badly affected by natural calamities in recent years. Also, the tax reduction announced in Union Budget applies only to Companies whereas most of micro, small and medium enterprises operate as proprietorship of partnership firms. A majority of MSMEs haven’t yet fully emerged out from the global economical downturn. Many of these are struggling to keep afloat, leave aside thinking of growth. The key challenge that transcends MSMEs of every size and hue is the easy availability of finance.
Clearly, there is a need for more innovations in the space of SME financing. In recent times, the bank credit to SME sector has actually reduced. While a small portion of MSMEs has accessed credit through online lending sources, this pipeline is too small for the present needs. A route that is gathering momentum is expansion of equity through Initial Public Offerings (IPOs). Though only about 340 companies have accessed markets in last 5 years, I believe that the numbers will increase rapidly in near future. The numbers have been low possibly because the regulators have been extra-cautious in preventing the unscrupulous elements from messing around. Guess, the lessons are learnt ant it is time to change gears.
Equity funding is also called growth funding for a valid reason. Shareholders bring their wealth to help the Company grow. Dilution of shareholding is not similar to selling family silver. I consider it as adding members to family who are sharing and backing entrepreneur’s growth vision. Entrepreneur’ ability and willingness to share vision is normally directly proportional to investors’ response of bringing in investment. Ofcourse, besides an IPO, Private Equity and Venture Capital are also available as options for equity funding. This is essentialy applicable to small and medium enterprises. It is indeed very tough for a large majority of micro-level enterprises to access capital markets for equity.
Most SMEs require funding for their working capital needs. Getting loans for working capital is often stressful with SARFESI Act not very empathetic to the cause of SMEs. For an entrepreneur, replacing business creativity with constant pressure to deliver profits does not augur well at times. He/she needs a partner who is in the game for long term and understands the need for more elbow room.
I may not be the best person to comment here, but getting a loan and floating an IPO would involve similar level of intricacies. My experience of working with several SMEs tells me that it gets much easier to get debt funding after a Company has had its IPO. Majority of Companies float an IPO to finance their working capital needs. Irrespective of the objects of IPO, this capital promises to ‘work’ better in the long run.
Infusion of fresh equity combined with initiatives by government would work really well both for sustenance as well as growth.